Explore HP's acquisition of Palm

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Introduction

Hewlett-Packard was considered a top company in the technology industry at the start of 2010. They were ranked 35 on Forbes magazine’s 2009 Global 2000 list, above companies such as Microsoft (49) and Apple (75). Their edge came from the number of technologies and services that they offered to their customers. Since they were already a big name in personal computing and were making their way into the smartphone market, begin work on a tablet seemed like a logical step. As they started development of their TouchPad, they realized that having their own operating system would make more business sense than licensing one from Microsoft.

First, it would set them apart in the market. Rather than just be another Microsoft tablet, they could single themselves out through their individualized platform. They also wanted to be able to provide full support to customers, rather than refer them two different places depending on if the software or hardware was the issue. Finally, they believed that their product would be stronger if the same engineers created the entire product. It is hypothesized that this plan came from watching Apple’s success as they launched the iPad using a very similar formula. They even went so far as to have a similar design and price to the iPad, which was unveiled in early 2010.

On April 28, 2010, HP’s CEO Jon Rubenstein announced their decision to acquire Palm. The main reason for this was Palm’s webOS software, an operating system for mobile devices based on the software used for the Palm Pilot. Their hope was to develop it further to work with the TouchPad to create a truly unique device. The concepts behind webOS were ahead of their time; it was one of the first web based operating systems and had multitasking abilities that many other tablet did not.

Palm was also of value to HP because they already had a grip on the mobile technology market. For years, the Palm Pilot and the BlackBerry were the two leading mobile devices. Apple was the first company to release true competition into the market, giving HP yet another reason to attempt to follow in their footsteps. Due to Palm’s early lead in the market, they had hundreds of patents related to phones, tablets, and software that would be of use to HP on top of the already developed webOS software.

As it turned out, HP purchased Palm for $1.2 billion in cash. The individual shareholders were paid $5.70 per share, which was 23% of Palm’s stock price the day before the acquisition. Palm had announced on April 12 of that same year that they were looking for a buyer, and HP was the first to bite. On that date, Palm was estimated to have a $870.8 million value. Most of this appraised value came from their intellectual property and mobile software. Clearly HP saw this potential and decided to jump on the opportunity before other could realize it as well.

Acquisition and Goodwill

In July 2010, HP acquired the mobile device company Palm for $1.8 billion dollars, including $5.70 cash paid per share for Palm common stock, a 23% premium on what the stock was worth according to Wall Street, as Hewlett-Packard had sought out Palm as an acquisition target primarily for its tablet platform, Web OS. HP believed that its reputation for computer products and financial strength combined with “Palm's unparalleled webOS platform” (quoted from HP investor relations statement, April 28, 2010).

Of the $1.8 billion dollar acquisition, $879 million was attributed to goodwill, $344 million in intangible assets, and $80 million in intellectual property, research and development. At the acquisition date, Palm had an estimated value of $1.4 billion in patents and other intellectual property, totaling 452 patents and 405 applications pending. In total, the inherent value of Palm was based on two things: the Palm name and the webOS software.

By 2010, HP began to see how much they had overvalued Palm’s Web IOS platform. In HP’s 2011 annual financial statements, $72 million of impairment was attributed to Web OS, and this was only the beginning. In the fall of 2011, HP would impair another $873 million dollars, essentially writing off the acquisition all together.

. Prior to the acquisition, Palm was in serious trouble. By March, the stock was already down 19% for the year, selling at a low of $4.59 per share. It was struggling to make a dent in the market with mobile manufactures such as Apple and Samsung dominating the mobile devise market, Palm was nearly obsolete. Analysts following Palm had estimated Palm’s stock falling as low as $0 per share. While analysts had labeled Palm essentially worthless, Hewlett-Packard estimated a value of $1.8 billion dollars. HP had seen something in Palm that the rest of the world did not see, perhaps because it just did not exist.

In the years following the acquisition of Palm, HP would be subject to the impairment of $885 million. There are many reasons for this massive impairment, however the Web IOS software failure can be attributed to the majority of the write-off. While the Web IOS platform was the main target in the acquisition and a large cost driver, it would prove to be a massive disappointment. One article by CNN accurately called it, “How to Waste a Billion Dollars”.

WebOS was crucial in HP’s plan to dive into the tablet and mobile computing business, as it tried to compete with Apple, who pioneer the tablet market. HP and Palm were in a rush to develop and market their webOS based tablet, the TouchPad. While it had hoped to launch into stores by the holiday season, the TouchPad didn’t make its way into stores until July, 2011. And almost immediately, it was a failure. Within six weeks, it was discontinued and remaining inventory sold at an embarrassing price. It would become a joke among employees. Many mistakes attributed to the failure of the TouchPad. First, the product itself was made with “cast-off reject iPad parts”, as quoted by an HP employee, discussing its lack of quality compared to its competition. Second, the tablet was released with a subpar version of webOS that was slow and prone to crashes, while it could have waited a few months for a more functional version. Lastly, HP refused to subsidize the price of the TouchPad, which would lower the price from $499 to $199. Retailers, like Best Buy, expected successful sales, as HP’s reputation as a computer giant released its first tablet. However, inventory started piling up in stockrooms so much so that Best Buy had to send back much of its inventory to HP and cancel future shipments. The few tablets that were sold at that premium price point were returned within a few weeks of purchase. At its release, the TouchPad was competing with the iPad 2, a well-established product with a reputation for superior quality. It all comes down to HP releasing a subpar product at a premium price.

With the fail of the HP’s launch into the tablet market, it was clear that there was no use or value in the webOS software, and by extension Palm. The whole reason for the $1.8 billion acquisition was the software by which HP would compete in the tablet market was a failure. It became known as the time HP wasted a billion dollars. By November 2011, HP was beginning to realize what analysts and investors knew all along, Palm was essentially worthless, with its only viable asset, webOS rendering itself worthless as well. HP once again had to write off a massive goodwill impairment due to its acquisition of Palm and its highly overvalued platform. On August 18, 2011, HP’s CEO Meg Whitman officially announced its plan to wind-down the webOS business, and “generously donate” webOS to the open-source community. In November 2011, HP issued an 8-K to write-down an $885 million impairment, with $813 million attributed to goodwill impairment, to the Palm acquisition, relating to the wind-down of the webOS software.

HP’s disastrous acquisition of Palm, Inc. continued their downward spiral of bad decisions that hurt the company as a whole. The failure of Palm and webOS also led up to a much larger failure a year later. Much like their purchase of Autonomy, this represented a case of poor decision-making and an inability to keep up with their competition. The acquisition of Autonomy in 2011 would prove to be the acquisition of Palm times ten. HP acquired Autonomy for $11.7 billion and within a year wrote off $8.8 billion in goodwill impairment. To quote Einstein, “the definition of stupidity is doing the same thing over again and expecting different results”, and this is exactly what HP was guilty of doing. Palm may have once been an industry giant but their time at the top was long over. Despite this HP President and CEO Leo Apotheker said in their 2010 Annual Report “With the acquisition of Palm, Inc., we added the most modern operating system in the market, positioning HP to drive innovation into the fast-growing area of connected mobility.” If they were relying on the purchase of Palm to move the company in a new direction they would be greatly mistaken. Many would wonder if the CEO was plain lying to its investors, or just that naïve.

Palm’s webOS software was one of the main components of the company that made it so desirable to HP. It was supposed to give their TouchPad an advantage over competitors, such as the iPad, by being more flexible. This would be accomplished by them being in control of both the software and hardware of their products. By this time it was apparent that tablet computers and smartphones were going to be big business and HP was betting heavily that acquiring this software from Palm would position them to get a larger piece of this increasingly profitable business. The Touchpad that HP was relying so heavily on to keep them relevant was pulled off the market after a mere seven weeks.

Poor decisions over the last several years had led to turnover at the top for HP. Carly Fiorina’s tenure as CEO was cut short when her purchase of computer manufacturer Compaq failed to generate profits for the company in 2002. After her, Mark Hurd was responsible for a number of big deals, the acquisition of Palm being one of them in 2010, and he too departed after making poor decisions and aggressive cost cutting. His replacement, Leo Apotheker, didn’t even last a whole year on the job, but in that time he realized his predecessors’ mistake and gave up on HP’s webOS debacle. Now it’s Meg Whitman’s time to turn around the company. All of these failed deals have led to high turnover at the top and have severely hurt the company’s credibility with investors.

Other Issues at HP

During the time of the acquisition of Palm, Hewlett-Packard’s management was very focused on acquisitions. Although they did develop some products and software on their own, they preferred to purchase companies that already had a head start on the technology and apply it to their business strategy. This was likely due to the fact that HP was already behind the competition in the smartphone and tablet markets; they did not want to waste resources on costly and time-consuming research and development projects when they had the possibility of purchasing a near-complete product. Management, therefore, moved quickly into each acquisition without necessarily doing the proper due diligence. Paul Mercer, the senior director of software at Palm, claimed that webOS was not ready for the market, stating, “Perhaps it never could have been executed because the technology wasn’t there yet.” The senior software engineer did not believe it could reach the capabilities HP was looking for, and yet they went through with the deal. This is especially worrisome when it comes time to value the acquisition. Although HP uses third party appraisal firms, those appraisers take into account the assumptions and estimates that management used when acquiring the company. They even state that these assumptions are “inherently uncertain.” Looking back after the impairment was taken, it is clear that HP and their appraisers believed Palm would be much more valuable to the company than it actually was.

Not only did Palm’s technology not meet the goals HP set, but a year later they had a similar problem with their acquisition of Autonomy. They purchased Autonomy because they planned to move into data analysis after their failure in the tablet market. Similar to the Palm acquisition, HP once again did not do its due diligence. A competitor in the market, Oracle, had looked at Autonomy but decided against acquiring it because they did not believe it had enough value. This should have been a red flag to HP that the acquisition was not in their best interest, but HP went through with it and later had to write-down another large impairment loss. HP claimed in their 2011 financial statements, however, that they “have been making focused investments to strengthen our portfolio of products and services that we can offer to our customers.”

Although they claim to be making focused investments, other parts of their financial data seem to disagree. In the decade before their acquisition of Palm, HP acquired over 40 other companies, across all of their business segments, and covering many different types of technologies. In addition, upon reading the management discussion and analysis section of the financial statements, you see that their business focus is quite wide: “We are a leading global provider of products, technologies, software, solutions, and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers, the government, health and education sectors.” It seems that HP provides every type of technology to any customer willing to buy. They claim to be focusing their business and their acquisitions without actually choosing a single segment or technology to focus on. Without a focus, it is hard for them to be sure that each product is getting the proper care and energy needed to make it competitive in the market.

Because they had such a variety of products, it was hard for HP to pay attention to what was happening in the markets for each product. Management focused purely on developing their product and didn’t pay attention to what the rest of the market was doing. The TouchPad and webOS were both at least a generation behind the competitive tablets in the market. In the technology market, you have to be the biggest, best, and newest to get attention; being mediocre will not get you very far. HP also did not work with third party developers to create applications for webOS, which meant that there was far less value in owning a TouchPad than any other tablet. Palm was also already behind the market when it came to portable devices. Although they had previously been a top competitor, back when the Palm Pilot and Blackberry were the major devices, they had since fallen behind. Apple and Android had taken over the market, and HP would have been smarter to join forces with one of them, most likely Andriod. Even Palm as a company was aware of this. Paul Mercer stated that, “Palm was ahead of its time in trying to build a phone software platform using Web technology, and we just weren’t able to execute such an ambitious and breakthrough design.” If HP had paid more attention to the market, they may have realized this before wasting a billion dollars on a worthless company.

Conclusion Ideas

Although HP was already a leading company in technology, they could feel others creeping up on them. The TouchPad was their solution: if they could put a tablet on the market that compete with or beat Apple’s iPad, then they could gain back their market share. They were willing to spend billions of dollars if it meant keeping that market share.

Forbes magazine number changes

Go through second paragraph of intro and say why each didn’t work out for them.

http://www.theverge.com/2012/6/5/3062611/palm-webos-hp-inside-story-pre-postmortem

http://www.fool.com/investing/general/2012/11/20/hewlett-packards-inevitable-impairment.aspx

http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-newsarticle&ID=1760639

http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-newsArticle&ID=1419424

http://money.cnn.com/2010/03/19/technology/palm_target_price_zero/

http://www.dailyfinance.com/2011/11/22/hp-writes-down-nearly-17b-in-losses-on-palm-invest/

http://www.tomshardware.com/news/hewlett-packard-palm-pre-phone-webos,10325.html

[1] http://www.sec.gov/Archives/edgar/data/47217/000110465910022576/a10-8994_1ex99d1.htm

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